In D&J Grant v HMRC [2016] UKFTT 0442 (TC), the First Tier Tribunal (“FTT”) has held that a taxpayer is not entitled to recover input tax on payments for goods that were never delivered because legal ownership did not pass and there has been no supply for VAT purposes.

D&J Grant (“D&JG”), a husband and wife farming business, ordered two wind turbines from a UK supplier. The contract provided for payment of a 30 per cent deposit (plus VAT) up front and a 40 per cent deposit (plus VAT) upon manufacture, with the balance being payable upon delivery. The contract further provided that the wind turbines remained the property of the seller until the entire contract price had been paid.

D&JG paid the two deposits and received VAT invoices for these amounts. The supplier subsequently went into administration and the wind turbines were never delivered. HMRC disallowed D&JG's claim for input tax of £93,800 in respect of the two deposits on the basis that no supply had taken place.

The FTT held that the wind turbines were not supplied to D&JG. Only 70 per cent of the purchase price had been paid and, according to the terms of the contract, legal title to the wind turbines had not passed. On this basis there was no supply for VAT purposes.

The tribunal made a strict interpretation of the definition of "input tax" in s.24(1) of VATA 1994 and held that, if there is no supply of either goods or services, no input tax can be claimed, even if a business has paid for the items in question.

The issue of fraud was raised by D&JG because it appeared that the supplier had not passed the deposits on to the manufacturer of the wind turbines to start the manufacturing process. The FTT considered whether these circumstances came within the rulings set down in the cases of Kittel & Belgian State [2008] STC 1537 and Bonik EOD [2013] STC 773, which confirmed that a business should not be liable to VAT as a result of a transaction if fraud was involved, provided the customer had no knowledge of the offence being committed by the seller. The Tribunal could not find any evidence that this was an act of fraud. Therefore, they could not see any basis on which the judgement of Kittel and Bonik could apply in circumstances where there was no supply.

The FTT acknowledged that the decision to deny input tax recovery was "a harsh burden for D&JG to accept" and that the circumstances relating to lack of delivery were unfortunate. However, the contract that D&JG signed was quite clear about the delivery and transfer of title being dependent on 100 per cent of the payments being made and, as HMRC had said, this was an unfortunate case of "buyer beware" (from the Latin, caveat emptor).

It is worth noting that the supplier was correct to charge VAT to D&JG because the receipt of the partial payments created a tax point, even though no supply had taken place. There is therefore a tension in situations such as this between the obligations of the seller to charge VAT on any partial payments, and the risk that the buyer may not be able to recover input tax if the supply does not take place.

It is important for buyers to be mindful of the potential for the recovery of input tax to be denied where sums are paid without title passing. Buyers and their advisors should carefully consider the terms of their contracts.